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UK industrial strategy: the real question about industrial policy is not whether it should be practised, but how

posted on 2nd August 2016

So yet again a UK parliamentary select committee is asking “do we need an industrial strategy?”. They have asked this many times before and the answer has tended to be ‘yes’. Reflecting the research and views of Harvard economics professor and expert on international development Dani Rodrik – the real question about industrial policy is not whether it should be practised, but how.
The Government’s ability to block foreign takeovers of British companies such as Softbank’s £24bn purchase of ARM – is to be examined by MPs in a new select committee.
Members of the Business, Innovation and Skills select committee have launched an inquiry into the country’s industrial strategy after Theresa May promised “much tougher scrutiny” of foreign businesses purchasing UK companies.
The Prime Minister made the pledge in her inaugural speech, and also signalled a new focus for the business department by rebadging it the Department for Business, Energy and Industrial Strategy (BEIS).
Although we have some fantastic large and small companies, its sad to see the likes of ARM being sold to an overseas investor. And although the rate of innovation is good, it is unremarkable compared to our international peers (as I have blogged here). What is also remarkable is that the UK’s international competitiveness, although rather bad compared to other OECD countries, never gets a mention in election campaigns. Yet its ramifications in terms of long term real wage growth have been argued to have fuelled the brexit vote.
We tend to experience periodic speculative booms, built on cheap credit and property – but then end up in bust – severe recessions that erode not just economic confidence, but often our productive assets and parts of our industrial base.
This is the story of the past 50 years. Only this time the recession or if we are lucky, a downturn, will have been self-imposed.
Looking back, numerous select committees and commissions have, time and again, concluded that the UK has consistently failed to create dynamic new industries and companies, to address its ‘long tail’ of low productivity businesses, and to have coherent policies for economic growth.
In 1985, the House of Lords Select Committee predicted that “the UK’s poor performance in manufacturing undoubtedly contained the seeds of a major political and economic crisis in the foreseeable future”. In 1991, another House of Lords Select Committee reported warned that, in the face of the UK’s declining manufacturing base, that ‘The implications for our future prosperity are grave’.
That major political and economic crisis is here, now. The implications for the future prosperity of the UK are grave. Can we really go on like this and expect our, and future generations’ quality of life to continually increase?
What we don’t need are the tactical slogans of the past 15 years, from both Cameron, Brown and Blair’s governments. We need a fundamental rethink about the UK economy – our ambitions, and the pathways to realising these.
The challenge is to produce coherent, long term policies for UK economic development and growth

WE NEED TO DO THREE THINGS TO PRODUCE THESE LONG TERM POLICIES:

FIRSTLY, WE NEED A GROWN-UP DEBATE

The debate is beyond party politics – governments of all colours have failed to address this. The sooner the politicians realise this, the better. The debate needs to break free from the rhetoric and invective of “public bad, private good”. We need to escape dogma, we need to throw away those tired old clichés, and those ideological beliefs that absolutely do not stand up to evidence and scrutiny.
We need to be open to new ideas. We need to express a vision of the future, and debate pragmatically and realistically how we are going to change this.
And its not going to be easy, nor a quick or cheap fix.
To successfully develop major new industries or future pathways to growth would be a major undertaking. If we think of historic examples such as the industrialisation and development of the economies of South Korea, Brazil, Taiwan or Singapore – to be successful, such a UK transformation is likely to require appropriate policies over 25+ years.

SECONDLY, SOCIETY MUST WORK TOGETHER WITH BUSINESS AND THERE IS A ROLE FOR GOVERNMENT HERE

Social institutions, and public policies and investment have played a significant role in the development of almost every major global industry, whether it has been the massive US Government R&D investments that were the foundations of Silicon Valley, or South Korea’s state-owned steel company (POSCO). And nations around the world recently committed trillions of dollars in public money to support the financial services sector after the credit crunch. Business and private enterprise play a significant role in the development of the economy, and public policy has an important role to facilitate, rather than constrain this.
To achieve long term growth, business and society must work together to forge the right institutional frameworks and policies and to make the right public investments.

THIRDLY, WE NEED GOOD IDEAS THAT ARE IMPLEMENTABLE

To improve policy we need good ideas that are implementable. Economic and industrial policy needs to be informed by well founded ideas where businesses, industries and communities have played their part in constructively informing the agenda.
As a student, and veteran of business policy and regional policy – I don’t think that Central Government is equipped to deal with this on its own.
A new non-profit organisation or partnership could develop into a powerful, coherent and rational voice whose ideas have the backing of industry and businesses, as well as communities.
I believe that governments play a critical role in the development of their nation’s industries and prosperity. Its something that many world experts on international development agree on:
Dani Rodrik, the Harvard economist said in his 2008 book that “the real question about industrial policy is not whether it should be practised, but how”
The World Bank in 2005 said that “the role of activist policies is controversial but is likely to have been important”.
Which industry has a regulatory agency employing 3,300 staff with a budget of £458 million per year? Which industry received an £850 billion bailout in 2008 and 2009? Financial services.
And let me tell you that those who say that business does not need government are wrong. Which industry has a regulatory agency employing 3,300 staff with a budget of £458 million per year? Which industry received an £850 billion bailout in 2008 and 2009? Financial services.
All this to protect and preserve one of the few industries in which the UK is a major global player.
I say that we should continue to support financial services, but we should also look to diversify our economy further and grow and prosper in a range of other industries and services.
In the months and years ahead, we will need a new economic policy to fill the vacuum. We will need to find ways to stimulate growth in existing, and new industries.
This isn’t about giving money to companies, or picking winners. Its about reimagining how society and business can work together for future prosperity. We need policy answers, and we need pragmatic sensible solutions.

BRITAIN HAS BEEN SUPPORTING INDUSTRIES LEFT, RIGHT AND CENTRE FOR THE PAST 45 YEARS – COULD DO BETTER?

Economic policy, and the support of industry is nothing new. What have we learned from our experiences in Britain? The first thing to note is that in Britain, despite the rhetoric of free markets, and not intervening in the economy, we have been supporting industries left, right and centre, for the past 40 years.
Even in the 1980s, that era worshipped by many anti-government acolytes, there were massive interventions to save British industries, and to fatten them up for privatisation. In 1981, the British government injected £990m into British Leyland to save it from liquidation; and wrote off £3.5 billion of British Steel’s capital, lending it an additional £1.5 billion.
BAE, ICL, BT, Jaguar, Rolls-Royce – the government financed the balance sheet restructuring in preparation for privatisation.
London docklands received £8 billion in public investment to create a new financial services district in Canary Wharf.
The UK Government’s role in the economy has a litany of reactive, tactical and incoherent knee jerk reactions that have never amounted to a coherent economic and industrial policy. Some could argue they only made things worse.
And the labour government (1997-2010), whilst pulling back from supporting industries in the early years – did boost spending on innovation, skills and business finance. Latterly, Lord Mandelson launched his policy of ‘industrial activisim’ in a late realisation that more could be done to help bolster and strengthen Britain’s existing and potential world class industries.

In the past recession, £850 billion was spent to bail out financial services. The lessons from this? That the government’s role in the economy has a litany of reactive, tactical and incoherent knee jerk reactions.

These actions have never amounted to a coherent economic and industrial policy.
We’re going to have to look internationally for the real lessons from success and failure. I’m going to take you through some of the lessons from the international experts, and from my own experiences working in government agencies trying to stimulate economic growth.

INDUSTRIAL POLICY: INTERNATIONAL LESSONS

1. Industries need a range of good conditions to thrive. We need to take a broad view. Industries need finance, skills, access to markets, stable economic environments, legal frameworks that work well and infrastructure.
We need to look at all the aspects.
2. Success always builds on some kind of existing advantage. Most successful industries have grown on the back of a local natural or human asset or advantage. The Cambridge Phenomenon was built on the back of global scientific research excellence. Taiwan created a semiconductors industry on the back of a successful engineering and design sector.
3. Successful industries work globally. Success needs global approaches. Government regulations, taxes and services need to conform to, or be superior to global standards. Global investors, customers and suppliers are likely to be discouraged if their customary approaches to business cannot be applied in any given nation. For example, New Zealand’s attempts to develop a venture capital industry did not make any progress until they implemented the regulations and conditions of tax liability and ownership that were common in all other nations which had successful global venture capital funding.
4. Industries are not technologies. I constantly witness governments confusing technology with industry. A technology is a given technical innovation. An industry is a whole supply chain – one piece of technology might form a tiny part of this supply chain. Successful industries tend to have large ‘footprints’ of activities and supply chains. Technological development and change has helped to form new industries, but then so have consumer behaviours and patterns of demand.
Policy initiatives such as the Labour government’s New Industries New Jobs policies in 2009 and George Osbourne’s “March of the Makers” tended to focus on technology and one-off grants, but arguably didn’t have sufficient focus on the prospects for commercial advantage and capacity.
Advanced technology does not always make it to market. There are plenty of examples of technologically superior products which turned out to be inferior in terms of their attractiveness to the market and their commercial returns.
5. Follow and use the market to pursue your policy objectives. Successful industrial policy follows the direction of the market by design. This often involves the development of effective incentives and flexible interventions. Governments should use market knowledge and analysis to guide their investments because markets respond to market conditions and incentives. Governments should also avoid rigidly designed policies and interventions. Often governments overly prescribe solutions, whereas they are often not well informed enough to design interventions on the ground. Policymakers need to listen to business, and be prepared to change or fine tune their policies.
6. Shoot the pork barrel, not the messenger. What gives active economic policy a bad name is pork barrel politics – the lobbying for government cash to go to certain industries in certain constitutencies. All government policy, as well as industrial policy is subject to these pressures. Whether its food safety standards – where the large food corporations weigh into the policy debate or healthcare – where its pharmaceuticals corporations or doctor’s associations, there will always be vested interests in any given policy area.
Governments must take steps to minimise their danger and act carefully when assisting industries. In the past, a lot of industrial policy has gone towards keeping outdated industries and industrial practices alive. Whilst this may be necessary in terms of smoothing the structural adjustments in the economy, it cannot last forever. Policies must either try to manage decline or manage transformation and evolution.

The best industrial policies allow winners to pick themselves

7. The best industrial policies enable industrial development – allowing winners to pick themselves. The real lesson here is in the enabling role of industrial policy and practice – achieving the right conditions and environment for growth, and building supporting activities to help potential winners to thrive in a competitive environment.
8. Economic and industrial policy by any other name. We often hear about innovation policies, and new initiatives to promote the ‘new economy’, ‘green economy’, or ‘knowledge economy’. Essentially these are all industrial policies. Industrial policy as a concept is broad, and involves the enabling and support of growth and development of existing and new industries.

Industrial policy needs a long-term view and stable policy goals and institutions (which may evolve and respond) – and this is a major failing in the UK

9. Industrial growth takes a long time and needs consistent, long term support
Lastly and perhaps most significantly, recognise the long lead times for industrial policy. You cannot create new industries and substantive new firms overnight.
A government that constantly changes its mind on what it will support and how it will support it – will not inspire confidence in our emerging growth industries – they will simply not believe that government is truly committed.
The best examples of industrial policy – such as Silicon Valley, Taiwan and Singapore – took many decades for new industries to develop and grow and resemble the mature and world competitive centres they are today.

We need growth. The UK economy is at a critical juncture

If we think that markets alone are going to forge a long term sustainable future for our economy – think again. All major industries of our competitor nations have had a significant government role somewhere along the line. And there are some quite extreme cases – China has 23 companies in the FT’s top 500 biggest companies. All of them are owned by state or local government.
For the UK – “the real question about active government involvement in supporting industries is not whether it should be practised, but how”
First published on linkedin at lnkd.in/eKbJrgg

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We relied on Glenn to bring clear thinking and creative suggestions to the most complex of issues and I can recommend him without any hesitation to bring great added value to all local economic development assignments.